LABOUR AND HUMAN RESOURCES

ECONOMICS
(ECN 215)

Lecturer: Rashidat Akande

 LECTURE 1
INTRODUCTION
 Overview

• Labour is a productive resource and labour economics is the

study of the market for this resource. How the labour market
works is of crucial importance for material well-being and the
performance of economies. This is the major reason why it is
an important aspect of economic research.
• Labor economics studies how labor markets work. Such as
labor force participation, the firm’s demand for the high-skill
workers, wage determination, the human capital investment,
the labor mobility, the labor market discrimination, trade
Unions and unemployment.
 What is Labour Economics
• Labour economics can be defined as the application of
economic analysis to examine the organisation, functioning
and outcomes of labour markets; the decisions of prospective
and present labour market participants; and the public
policies relating to the employment and payment of labour
resources.
 Labour Economics as a
Discipline
Why do we study Labour economics?
• The sale of labour services is the major source of household
income in the economy.
• To understand the distribution of income in the society, we
need to understand the labour market and the behavior of its
participants.
• Labour economics helps us understand the causes and
outcomes of major socioeconomic issues; unemployment,
immigration, wage increase etc..
• Labour market has some peculiar features that needs to be
studied. These features has important implication for how the
labour markets work
 Labour Economics as a
Discipline
For example:

Labour Market Consumer Market

household is seller household is purchaser

firm is purchaser firm is seller
Wage Price
 Actors in the labor Market
• The workers – they decide whether to work or not or how many
hours to work. they will always act to maximise their well being.
Adding up all the decision of workers will generate the economy’s
Labor supply

• Firms - they decide how many workers and which type of workers
to hire. They want to minimise cost and maximise profits. The firms
make up the demand for labour

• Government – they influence the decision of workers and firms by

imposing taxes on workers earning or firm’s income, they can
subsidize workers training e.t.c all this will affect the equilibrium in
the labour market.

• Labour union – influence workforce and represent interest of

workforce. They can also influence political outcome
 Food for thought
• Labour is a productive resource because it is one of the
factors of production. In economics productive resources are
scarce. Would you say labour is scarce given the current level
of unemployment in Nigeria?
LABOUR AND HUMAN RESOURCES
ECONOMICS
(ECN 215)

Lecturer: Rashidat Akande

 LECTURE 2
DEMAND FOR LABOUR
 Demand of labour
• The demand for labour is a derived demand, this means that
the demand of labour depends on or is derived from the
product or service it is helping to produce or provide. Workers
are hired for the contribution they can make toward
producing some good or service for sale.
• The fundamental assumption of labour demand theory is that
firms (the employer of labour) seek to maximize profits. They
continue to make changes so as to improve their profit
• The profit maximization require us to understand the firms
production function and the marginal incremental or changes.
This implies considering a small change in one input while
holding employment of other input constant.
 Short run demand of labour
Production function
• The production function describes the technology that the firm uses
to produce goods and services.
• the short run as a time span that is sufficiently brief that the firm
cannot increase or reduce the size of its plant or purchase or sell
physical equipment. In the short run, therefore, the firm’s capital
stock is fixed at some level K

We will assume the production process consist of two input i.e. capital
(K) and labour (L), Labour is homogenous and capital is fixed.

Short run total product is a function of variable input (L) and fixed input
(K)
TPSR = f(L, K)
Q = F(L,K)
 Short run demand of labour
Production function
• Total product is the total output produced by each
combination of the variable input of labour and fixed amount
of capital
• Marginal product of labour is the change in total product
associated with the addition of one more unit of labour,
holding constant the quantities of all other inputs.
• The average product of labour is the total product divided by
the number of labour units. It is the amount of output
produced by the typical worker.
Production function
Production function
Production function
 Production function
• The assumption that the marginal product of labor eventually
declines follows from the law of diminishing returns.
• The first few workers hired may increase output substantially
because the workers can specialize in narrowly defined tasks.
As more and more workers are added to a fixed capital stock
(that is, to a fixed number of machines and a fixed amount of
land), the gains from specialization decline and the marginal
product of workers declines
• The firm’s objective is to maximize its profits. The firm’s
profits are given by

• Profits = pQ - wL - rK
• where p is the price at which the firm can sell its output, w is
the wage rate (that is, the cost of hiring an additional worker),
and r is the price of capital
• A firm that cannot influence prices is said to be a perfectly
competitive firm. Because a perfectly competitive firm cannot
influence prices, such a firm maximizes profits by hiring the
“right” amount of labor and capital.

• As a result, the price of the output p is unaffected by how

much output this particular firm produces and sells, and the
prices of labor (w) and capital (r) are also unaffected by how
much labor and capital the firm hires. From the firm’s point of
view, therefore, all of these prices are constants, beyond its
control.
 Short run demand of labour
Perfect competitive market
• Product price does not reduce as more output is produced
and sold because the market is perfectly competitive.
• A profit maximizing firm would hire more workers so long as
each successive worker adds more to the firm’s total revenue
than to his total cost.
• MRP(Marginal revenue product is the increase (change) in
total revenue resulting from the employment of each addition
labour unit.
• The amount the worker adds to total cost is measured by the
MWC(Marginal wage cost), defined as the change in total
wage cost resulting from the employment of one more labour
unit.
 Short run demand of labour
Perfect competitive market
• The profit maximising firm would hire units of labour up to the
point at which MRP = MWC. This rule is also the same as that
of the MR = MC which is the profit maximizing output in the
product market.
• If the firm is hiring in a perfect competitive market, this
implies that the firm is a “wage taker”. The total wage cost
would increase by the amount of wage rate W for each
additional unit of labour hired. This means that W and MWC
are equal. Therefore MRP = W, the profit maximizing firm that
is a perfectly competitive employer of labour should employ
units of labour up this point.
 Perfect competitive market

(1) (2) (3) (4) (2)x(4) (6) (7)

Units of TP MP Product Total MRP VMP
Labour L ΔTP/ΔL Price, P Revenue (ΔTR/ΔL) (MP x P)
TR
4 15 N2 N30
5 27 12 2 54 N24 24
6 36 9 2 72 18 18
7 42 6 2 84 12 12
8 45 3 2 90 6 6
9 46 1 2 92 2 2
 Labour dd curve of a perfectly
competitive seller
30

24
Wage=MRP

18

12

6
MRP=DL=VMP
2

0 4 5 6 7 8 9
Qty of Labour
• If MRP < W, the firm would hire lesser unit of labour till MRP =
W
• If MRP > W, the firm would hire more units of labour till MRP
=W
• Application of the MRP = W rule reveals that the MRP curve is
the firm’s short-run labour demand curve. Under perfect
competition in the product market, MRP = VMP and the
labour demand curve slopes downward solely because of
diminishing marginal productivity.
• The firm is a price taker and can sell as many unit of output at
the market price N2, the sale of each additional unit adds N2
to the total revenue. Therefore MR is constant and equal to P.
 Short run demand of labour
Imperfect competitive market
• Most firms in the economy do not sell their products in purely
competitive markets
• They sell their products under imperfect competitive market
conditions i.e. Monopolies, oligopolies…
• There is product differentiation and uniqueness
• The firm must lower his price to sell the output contributed
by each successive worker.
• The sale of an extra unit does not add its full price to the firms
marginal revenue
 Short run demand of labour
Imperfect competitive market

(1) (2) (3) (4) (2)x(4) (6) (7)

Units of TP MP Product Total MRP VMP
Labour L ΔTP/ΔL Price, P RevenueT (ΔTR/ΔL) (MP x P)
R
4 15 N2.60 N39.00
5 27 12 2.40 64.80 N25.80 N28.80
6 36 9 2.20 79.20 14.40 N19.80
7 42 6 2.10 88.20 9.00 N12.60
8 45 3 2.00 90.00 1.80 N6.00
9 46 1 1.90 87.40 -2.60 N1.90
 Short run demand of labour
Imperfect competitive market
39.00

25.80 MRP=Dl

14.40

9.00

1.80 VMP

0 4 5 6 7 8 9
 Short run demand of labour
Imperfect competitive market
• Under imperfect competition in the product market, the
firm’s demand curve slopes downward because MP
diminishes as more unit of labour are employed and because
the firm must reduce the product price on all unit of output as
more output is produced
• MRP < VMP at all level of employment beyond the first unit
Question
Assume labour is the only variable input that an additional unit of
labor increases total output from 65 to 73 units. If the product
sells for N4 per unit in a perfectly competitive market, what is
the MRP of this additional worker? Would the MRP be higher or
lower than this amount if the firm were a monopolist and had to
lower its price to sell all 73 units?
 Long-run Demand of Labour
• Assume L and K are the only two inputs and that labour is
homogenous
TPLR = f(L,K)
• The long-run demand for labour is a schedule or curve
indicating the amount of labour that firms will employ at each
possible wage rate when both labour and capital are variable.
• There are two major effects that alters the long-run demand
curve
a. The short-run output effect
b. The long-run substitution effect
 Long-run Demand of Labour
Output Effect
This is a short-run change in employment resulting solely from
the effect of a change in wage on the employers cost of
production. MC1 MC2

P MR

Q1 Q2
Long-run Demand of Labour
The figure above demonstrate the output effect of a wage
decline. All other conditions being equal, a decline in wage rate
will reduce the marginal cost curve from MC1 to MC2. This means
the firm can produce any additional unit of output at a lesser
cost. This will shift the quantity from Q1 to Q2 since a profit
maximising firm will produce at MC = MR. To produce the extra
output the firm will need to employ more labour.
 Long-run Demand of Labour
Substitution Effect
• This is a long-run change in employment resulting solely from
a change in the relative price of labour, holding output
constant.
• This effect occurs as a result of the variability of capital and
labour in the long-run unlike in the short-run where the
capital is fixed therefore no substitution in production
between labour and capital can occur
• The firm can respond to change in wage by substituting it for
some type of capital in the production process.
• The long-run response to change in wage is greater than that
of the short-run. This means that the LR demand curve will be
more elastic than the SR demand curve
 Long-run Demand of Labour
The Combined Effect; Long-run labour demand curve

a
W1

b
W2

DLR

DSR
0 Q Q1 Q2
 Long-run Demand of Labour
• By combining the two effects we came up with a long-run
labour demand curve.
• Suppose the firm faces an initial short-run labour demand
curve DSR with initial equilibrium wage rate and quantity W1
and Q at point a.
• A wage reduction from W1 to W2 as a result of short-run
output effect increases employment to Q1 at b.
• In the long-run however, the firm can substitute labour for
capital. This would further increase the quantity of labour
employed to Q2 at point c.
The Market Demand of Labour
• By summing horizontally on a graph, the labour demand curve
of all firms that employs a particular kind of labour, we get the
market demand curve for that labour.
• This means that if there are 200 firms with a specific labour
demand, we simply multiply the amounts of labor demanded
at the various wage rate by 200 and thereby determine the
market demand curve.
 Elasticity of Labour Demand
Wage Elasticity Coefficient
• Wage elasticity coefficient is the sensitivity of the quantity of
labor demanded to wage rate.
Ew = % change in the Qty of labour
% change in wage rate
• Since there is an inverse relationship between the quantity of
labour and wage rate. The elasticity would always be negative
• The demand is elastic and greater than 1 when employers are
quite responsive to change in wage rates.
• Demand is inelastic or less than 1 when a given percentage
change in wage causes a smaller change in quantity of labour
(employers have low response)
• When the percentage change is equal to 1, then demand is
unit elastic.
 Elasticity of Labour Demand
Determinants of Elasticity
• Elasticity of Product Demand: the demand of Labour is
derived from the demand of the product it is used to produce,
therefore the elasticity of demand of labour’s output will
influence the elasticity of demand of labour. The greater the
price elasticity of product demand, the greater the elasticity
of labour demand.
• Ratio of Labour Costs to Total Costs: the larger the proportion
of labour cost in the total production cost, the greater will be
the elasticity of demand for labour. For example if the ratio of
labour to total cost is 80% - then a 20% increase in wage rate
would increase the total cost by 16%. This large increase in
cost would increase the product price and reduce the sale of
output and therefore a large decline in the employment of
labour
 Elasticity of Labour Demand
Determinants of Elasticity
• Substitutability of Other Inputs: the greater the
substitutability of other input of labour the greater will be the
elasticity demand of labour. If technology is such that capital
can be readily substituted for labour, then a small increase in
wage rate will lead to an increase in the amount of machinery
used and a large decline in the amount of labour employed.
• Supply Elasticity of Other Inputs: other things being equal, the
greater the elasticity of the supply of other input the greater
the elasticity of demand for labour.
LABOUR AND HUMAN RESOURCES
ECONOMICS
(ECN 215)

Lecturer: Rashidat Akande

 LECTURE 3
SUPPLY OF LABOUR
 Supply of Labour
• What influences the labour supply decision i.e whether to
work or not?
• Why do some people supply more hours of labour at a given
wage rate while some supply lesser hours at same rate.
• How do individual decide on the number of hours of labour to
supply in the market
• Applying the basic theory of individual labor supply will help
answer these questions
 Supply of Labour
• We start with the theory of static labour supply, which
examines the decisions of one individual at one point in time.
• Each individual in the market decides whether to work and – if
he decides to work – how many hours to work, given the
current market wage and any source of non-labour income.
• In order to derive this theory we use the standard tools of
microeconomics
• This model is extremely helpful in understanding a number of
issues that are of policy concern. For example, the model
helps us understand how unemployment benefits affect
participation in the labour market.
 The Work-Leisure Decision
• Assume an individual with a given level of skills
• The individual has a fixed amount of time available
• He must decide the time to be allocated to work (labour
market activities) and leisure (non-labour market activities)
• Work is the time devoted to a paying job
• Leisure is used here to include all kinds of activities for which
a person does not get paid i.e. time spent on consumption,
education, commuting, relaxation e.t.c.
 The Work-Leisure Decision
• To determine the optimal distribution of an individuals time
between work and leisure we need the;
1. Indifference curve
2. The budget constraint
An indifference curve shows various combinations of real income
and leisure time that will yield some specific level of utility or
satisfaction to the individual. The slope of the indifference curve
is measured by marginal rate of substitution of leisure for income
the budget (wage) constraint line shows all the various
combination of income and leisure that a worker might realize or
obtain, given the wage rate. The slope of the budget line is the
wage rate.
Utility and Indifference Curve
• The notion that individuals get satisfaction from consuming
goods and leisure is summarized by the utility function:

• The utility function transforms the person’s consumption of

goods and leisure into an index U that measures the
individual’s level of satisfaction or happiness. This index is
called utility. The higher the level of index U, the happier the
person. We make the sensible assumption that buying more
goods or having more leisure hours both increase the person’s
utility
Utility and Indifference Curve
 Utility and Indifference Curve
Properties of Indifference curve
• Indifference curves are downward sloping.
• Higher indifference curves indicate higher levels of utility.
• Indifference curves do not intersect.
• Indifference curves are convex to the origin
• A rational consumer will want to maximise her utility. But she
cannot choose freely any bundle of consumption and leisure.
She faces two constraints. The first constraint comes from the
fact that extra consumption can only be afforded at the cost
of extra work. This is called the budget constraint and it is
written as follows:

• C = V + WH
• where V is unearned income that is to say any income level
the worker receives which is independent of how much she
works.
• For example, state benefits paid to the unemployed, or the
money transfers children receive from their parents are all
sources of unearned income. Implicitly we have assumed here
that the price of consumption goods is equal to one.
• W is the market wage rate, or the increase in income
associated with one extra hour of work H. The budget
constraint simply states that any expenditure on consumption
(C) must be financed by either earned income (WH) or
• by unearned income (V). We assume in this case that one
cannot borrow and there are no savings.
 Slope of Indifference Curve
• The absolute value of the slope of the indifference curve at a
given point is called the marginal rate of substitution (MRS).
The marginal rate of substitution measures the change in
consumption that is required to keep utility unchanged as
leisure changes by one unit.
Work Leisure Decision
 Work Leisure Decision
• The budget line FE describes the opportunities available to a
worker who has $100 of non-labor income per week, faces a
market wage rate of $10 per hour, and has 110 hours of non-
sleeping time to allocate between work and leisure activities.
• The optimal consumption of goods and leisure for the worker,
therefore, is given by the point where the budget line is
tangent to the indifference curve. This type of solution is
called an interior solution because the worker is not at either
corner of the opportunity set (that is, at point F, working all
available hours, or at point E, working no hours whatsoever).
 Work Leisure Decision
• At the optimal point P, the budget line is tangent to the indifference
curve. In other words, the slope of the indifference curve equals the
slope of the budget line. This implies that;

• At the chosen level of consumption and leisure, the marginal rate of

substitution (the rate at which a person is willing to give up leisure
hours in exchange for additional consumption) equals the wage rate
(the rate at which the market allows the worker to substitute one
hour of leisure time for consumption).
Effect of a Change in non-
Labour Income
Effect of a Change in non-Labor
Income
• Initially, the worker’s non-labor income equals $100 weekly, which is
associated with endowment point E0. Given the worker’s wage rate,
the budget line is then given by F0E0. The worker maximizes utility
by choosing the bundle at point P0. At this point, the worker
consumes 70 hours of leisure and works 40 hours.
• The increase in non-labor income to $200 weekly shifts the
endowment point to E1, so that the new budget line is given by
F1E1.
• An increase in non-labor income leads to a parallel, upward shift in
the budget line, moving the worker from point P0 to point P1. (a) If
leisure is a normal good, hours of work fall. (b) If leisure is an inferior
good, hours of work increases. The impact of the change in non-
labor income (holding wages constant) on the number of hours
• worked is called an income effect.
Effect of a Change in Wage rate;
Income and Substitution Effect
Income and Substitution Effect
• The initial wage rate is $10 per hour. The worker maximizes her
utility by choosing the consumption bundle given by point P, where
she is consuming 70 hours of leisure and works 40 hours per week.
• Suppose the wage increases to $20. the budget line rotates and the
new consumption bundle is given by point R. The worker is now
consuming 75 hours of leisure and working 35 hours. As drawn, the
person is working fewer hours at the higher wage.
• The wage increase generates two effects: It increases the worker’s
income and it raises the price of leisure.
• To isolate the income effect, suppose we draw a budget line that is
parallel to the old budget line (so that its slope is also –$10), but
tangent to the new indifference curve. This budget line (DD)
generates a new tangency point Q.
• The move from initial position P to final position R can then be
decomposed into a first- stage move from P to Q and a
second-stage move from Q to R.
• The move from P to Q is the income effect
• The second-stage move from Q to R is called the substitution
effect. It illustrates what happens to the worker’s
consumption bundle as the wage increases, holding utility
constant.
• The move from point Q to point R illustrates a substitution
away from leisure time and toward consumption of other
goods.
• We can use the utility-maximization framework to derive a
labor supply curve for every person in the economy. The labor
supply curve in the aggregate labor market is then given by
adding up the hours that all persons in the economy are
willing to work at a given wage.
The Backward-Bending Labour
Supply Curve
• The labor supply curve traces out the relationship between
the wage rate and hours of work. At wages below the
reservation wage ($10), the person does not work.
• At wages higher than $10, the person enters the labor
market. The upward-sloping segment of the labor supply
curve implies that substitution effects are stronger initially;
the backward-bending segment implies that income effects
may dominate eventually.
• The reservation wage gives the minimum increase in income
that would make a person indifferent between remaining at
the endowment point E and working that first hour.
• To measure the responsiveness of hours of work to changes in
the wage rate, we define the labor supply elasticity as
LABOUR AND HUMAN RESOURCES
ECONOMICS
(ECN 215)

Lecturer: Rashidat Akande

 LECTURE 4
WAGE DETERMINATION AND
THE ALLOCATION OF LABOUR
 Introduction
• What mechanism allocates us to our various occupations and
specific work place?
• How are occupational and individual wage rates determined?
Why do a bank manager earn more than a cleaner?
• Who or what determines the occupational composition of the
total jobs in the economy?
• To answer these questions, we will combine labour supply and
demand into a basic model
• Note that we will assume here that all compensation is paid in
form of wage rate
 Perfectly Competitive Labour
Market
CHARACTERISTICS

• Many firms competing with one another to hire a specific type

of labour to fill identical job
• Many people with identical skills independently supplying
their labour services
• Both firms and workers are “wage-takers”
• Information and labour mobility is perfect and costless
 Perfectly Competitive Labour
Market
To analyse the competitive market for a specific type of labour
we need;
1. The labour demand; which reflects the behavior of
employers.
2. Labour supply; derived from the decision of workers
• From the previous lecture (Lecture 2) we found the market
demand for a particular type of labour by summing over a
range of wage rates, the prices of labour that employers
desire to hire at each of the various wage rates.
• In lecture 3, the individual labour supply curve is backward
bending but this is not the case for the labour market. Supply
of labour is usually upward sloping.
 Market Supply
• This is because, collectively workers will offer more labour
hours at higher wage-rates.
A) Individual Labour Supply B) Market Supply of Labour
SC S D SE
SA SB 2+6+7+7+8 z
W3 W3
Wage rate

SD SE
y
W2 W2
5+10+5
SC
x
W1 W1
SB 4+6 SL
SA

0 1 2 3 4 5 6 7 8 9 10 0 10 20 30

Hours Hours
 Market Supply
• The diagram above explains the positive relationship between
wage rate and quantity of labour hours supplied in most
labour markets
• Graph A shows the separate backward-bending individual
labour supply curves in a specific labour market.
• Graph B sums the curves horizontally to produce a market
labour supply curve.
• The figures implies that even though specific people may
reduce their work hours as market wage rises, labour supply
curve of specific labour markets generally are positively
sloped over realistic wage ranges.
• The Higher relative wages attract workers away from
household production, leisure, or other labour markets and
towards labour markets in which the wage increased.
 Wage and Employment
Determination

D0 S0
a b
WES

W0

WED
c d

S0 D0

0 Q1 Q0 Q2
 Wage and Employment
Determination
• The figure above combines the labour demand and supply
curves for a specific type of labour.
• W0 is the equilibrium wage rate and the equilibrium quantity
is Q0.
• If the wage were WES, an excess supply or surplus labour
would occur (b – a) and would drive the wage down to W0.
• if the wage were WED, an excess demand or shortage
(e – c) of workers would develop and wage would increase
to W0.
• Wage W0 and employment level Q0 are the only wage-
employment combination which the market clears. This is the
point where the number of hours offered by labour supplied
matches the ones the firm desire to employ.
 Determinants of Labour
Supply
• Other wage rates; An increase/decrease in the wages paid in
other occupations for which workers in a particular labour
market are qualified will decrease/increase labour supply
• Nonwage income; A increase/decrease in income other than
from employment will decrease/increase the labour supply
• Preference for work versus leisure; A net increase/decrease in
people’s preferences for work relative to leisure will increase/
decrease labour supply
• Nonwage aspect of job; An improvement/worsening of the
nonwage aspect of job will increase/reduce labour supply
• Number of Qualified suppliers; An increase/decrease in the
number of qualified suppliers of a specific grade of labour will
increase/decrease labour supply.
 Determinants of Labour
Demand
• Product demand; changes in product demand would change
the product price and MRP and thereby change the demand
for labour
• Number of Employers: assume there is no change in
employment by other firm hiring specific grade of labour, an
increase (decrease) in the number of employers will increase
(decrease) the demand for labour.
LABOUR AND HUMAN RESOURCES
ECONOMICS
(ECN 215)

Lecturer: Rashidat Akande

 LECTURE 5
WAGE DIFFERENTIALS
 Wage Structure
• It is obvious that there are large variations in wages and salaries.
• A bank manager may earn N24 million a year; his secretary,
N1.2million; and his driver N500,000.
• Many of these wage differentials are equilibrium wage differentials;
they do not induce movement of labour from the lower-paying to the
higher-paying jobs.
• Other wage variation are transitional wage differentials; they
promote worker mobility that eventually reduces the wage
disparities.
• In a perfect competitive market where jobs and workers are
homogenous with perfect mobility of labour and competition, there
would be no variability in the wage structure. The average wage
rate would be the only wage rate in the economy.
 Wage Differentials
• If we observe the economy we see that wage differentials do
exist and many of them persist over time.
• What are the source of these wage differentials, how can they
persist?
• why do some wage differences narrow over time while others
remain the same or increase?
• To answer this questions, we need to ignore several
assumptions of competitive market.
• More specifically, wage differentials occur because
1. Jobs and workers are heterogeneous
2. Labour markets are imperfect.
 Wage Differentials
Compensating Differentials
• In reality, jobs are heterogeneous not homogeneous.
Heterogeneous jobs have differing nonwage attributes,
require different types and degrees of skill, or vary in the
effectiveness of paying efficiency wages to increase
productivity.
• Compensating wage differentials consist of the extra pay that
an employer must provide to compensate a worker for some
undesirable job characteristic that does not exist in an
alternative employment.
• Compensating wage differentials are thus equilibrium wage
differentials because they do not cause workers to shift to the
higher-paying jobs and thereby cause wage rates to move
toward equality.
 Compensating wage
Differentials
Sources of Compensating Differentials
• Risk of Job Injury or Death: the greater the risk of being injured or
killed on the job, the less the labour supply to that particular
occupation. For this reason jobs having high risks of accidents
relative to others requiring similar skill will command compensating
wage differentials.
• Fringe Benefits: In other to attract qualified workers, the firms that
do not pay fringe benefits ( e.g. company car, health insurance,
subsidized meals e.t.c.) will have to pay a compensating wage
differential that will cover up for it.
• Job Status: Some jobs offer high status and prestige and hence
attracts many willing suppliers, other job carries with it some sort of
social stigma. E.g. a semiskilled worker working in an electronic
company and a similarly skilled worker in a sewage disposal plant.
 Compensating wage
Differentials
• Job Location: compensating differentials may arise in location
lacking amenities. Cities noted for their livability may attract
more supply of workers in a specific occupation than cities
mainly noted for low security or industrial pollution
• Prospect of Wage Advancement : labour supply would be
greater to jobs that with higher prospects for increased
earnings than firms with flat lifetime earning streams. This will
necessitate a compensating wage differential.